The Economy and the Stock Market Aren’t the Same

Don’t read too much into this chart, but I think it’s interesting for investors to take note of. This is a scatterplot of the annual change in nominal GDP (horizontal) along with the annual change in the S&P 500 (vertical):

Just looking at it, there’s no correlation. In fact, it almost appears to be slightly negative.

I think there are a few important takeaways. The first is that the stock market is not the economy. They are different animals though closely related. For one, the stock market tries to anticipate the economy so it will often lead it by a few months.

Also, the stock market is concerned with corporate profits which is only a small part of the overall economy. Over the past few years, for example, corporate profits have grown quite well, but the overall economy has not.

You should always hold economic news, good or bad, at a slight distance when considering your investments.

Here’s nominal GDP (blue, left) along with the S&P 500 (right, red). Both are in log scale.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 eight times in the last nine years. (more)